Infotech and the Law: It's not easy staying small

A familiar regulation of the Small Business Administration allows a contractor that qualified as a small business at the time it won a contract to be considered small for the life of the contract. More than three years after SBA proposed to amend it, that regulation remains in force.

But certain changes in procurement policy and developments in case law have limited the regulation's effect on Federal Supply Schedule contracts and other multiple award contracts.

Government contracting officers now have broad discretion, and sometimes the responsibility, to request updated size certifications when they exercise contract options or compete task orders under these types of contracts. A Court of Federal Claims decision late last year on LB&B vs. United States illustrates the point.

The Air Force in 2001 awarded LB&B one of 11 indefinite-delivery, indefinite-quantity contracts for flight simulation and training services. At the time of award, LB&B qualified as a small business.

Four years later, when the Air Force competed the task order at issue among the small-business IDIQ contractors, LB&B had grown and no longer could certify that it was small. When the contracting officer asked for new size certifications, LB&B relied on its original certification for the IDIQ contract.

The Air Force refused to accept LB&B's position and asked SBA for a formal size determination. LB&B argued that it properly relied on its original certification, and that the contracting officer violated SBA regulations by requesting an updated certification at the time of task order award.

SBA disagreed, concluding that the contracting officer had discretion to request such a certification. The Court of Federal Claims agreed with the agency. LB&B, because it no longer could certify as small, was ineligible for the task order.

Cases such as LB&B should concern small businesses positioning themselves to compete for the increasing number of multiple-award contracts let by federal agencies. These contracts can have terms of up to as much as 20 years, while the time for which a contractor can certify as small for the task orders awarded under those contracts, as demonstrated by the LB&B case, can be far less.

Small businesses, therefore, must consider the possibility that they'll get less than they expect from these long-term, multiple-award contracts. As their businesses grow, they could find themselves at the mercy of a contracting officer, and ineligible after a few years for orders that they once received regularly.

The same issue can affect the calculus when a large business considers buying a small business that is a multiple-award contract holder. Though the law does not require a contracting officer to terminate small-business set-aside contracts or task orders held by companies that are acquired by large businesses, such an acquisition will immediately prevent the acquired firm from competing for new set-aside task orders that require an updated size certification.

The result is that neither the buyer nor the seller may be able to rely comfortably on pre-acquisition order volume as a predictor of future order volume.

Much of this uncertainty will disappear if SBA finalizes a rule first proposed three years ago. But certainty is not always better; the rule as proposed would require all multiple-award contract holders to certify annually their size status. Such a requirement would convert what is now only a risk into an annual reality.

Whether or not SBA finalizes the rule as proposed, small businesses must compete for multiple-award contracts with full knowledge of the risks of future size-certification requirements.

David Fletcher is an associate in the government contracts practice of DLA Piper Rudnick Gray Cary US LLP in Washington. He can be reached by e-mail at david.fletcher@dlapiper.com.